venture capital Archive
Earlier this month I made my feelings about OpenTable abundantly clear, and as I said then, the reason the company is most likely anxious to get all those unused dining checks off its books is because it's gussying up its financials to go public. Of course, I thought the company would wait until the market recovered. Nope, they filed today, which means OpenTable is either very optimistic about a turnaround in 2009 or really needs some cash.
Since flaming the company, I've had a few conversations with people who really do love it, find it useful and have not had my issues. (Although most everyone I've talked to agrees the dining rewards program is lame, at best.) Still, should OpenTable price, I don't think this is a stock you want to own for the following five reasons:
1. Did I mention it's 2009? Have you seen the markets?
2. OpenTable is essentially a local business. They have to conquer territory market-by-market, restaurant-by-restaurant. Local is one of the hardest and most expensive things to do well. It's also one of the only things that the Internet doesn't particularly make easier. Just look at Craigslist: The gods of local. The site's traffic is still dominated by a few big cities. Local hits tipping points and network effects but only in each city. There is traditionally no national tipping point for locally-oriented businesses. In other words, a restaurant in Memphis isn't going to do something because a restaurant in New York finds it valuable.
3. Margins. Imagine that! OpenTable isn't very profitable selling software-as-a-service. That's because it's a very expensive business model to scale, as I've detailed at length here. In short: The software doesn't sell itself, subscription revenues are monthly and steady, but lower in dollar amount and customers can cancel at any time. Such is the pay-as-you-go business model. You can build a huge business here as Salesforce.com has proven. Unfortunately, it's really the only one who has proven that. Even Netsuite, who I'm very bullish on, has struggled with profitability.
4. Restaurants are going to be closing and cutting corners as the recession wears on-- that can't be good for revenue growth. When fewer people are coming in your doors, do you need to pay for a reservation service?
5. The online travel agency effect. I could be way off here, but a lot of San Francisco restaurants just take reservations on their own sites, eschewing OpenTable. They don't want to pay the fees, and why should they when building and maintaining a Web site isn't exactly hard in this day and age? OpenTable may have brought restaurants into the online age, the way sites like Expedia and Travelocity did for the airlines, but increasingly vendors hate middlemen. Especially middlemen who control the customer relationship and take a cut of the proceeds. A lot of restaurants will still want to outsource, of course, but I think it's a risk when it comes to growth.
To OpenTable's credit, they reached out to me after that nasty early January post, and I was supposed to have a sit down with CEO Jeff Jordan. That's not happening now thanks to the quiet period! But I look forward to talking to him when he can talk again. OpenTable has always been ostrich-like when it comes to media so maybe there's something I'm missing here. I'm always open to someone changing my mind, as Tony Hsieh knows!
A lot of stories in the press in the last few days that echo my past BusinessWeek columns about how this downturn is very different for the venture capital industry. Problems in short: The ten year index that the industry has held up since the Nasdaq crash is about to plummet. 1999 and early 2000 returns will fall off in a little more than a year, and more than 70% of VCs don't expect an exit window until 2010 at the earliest. Problem #2: Beleaguered institutions that invest in venture capital are increasingly trying to sell off their stakes. Worse: Some are considering flaking on capital calls altogether.
To those of you who say platitudes like: "Downturns are GREAT times for innovation!" yes, that's true, but you are missing the point. This isn't just the cause of a downturn. This is a structural change in the industry that needs to occur and has been building for nearly a decade. There is far too much money, tech is maturing, and clean tech isn't mature enough. Paul Kedrosky and I discussed yesterday on TechTicker:
But, beyond all this, I think there's also a mindset problem when it comes to venture capital. Investors and many entrepreneurs are no longer focused on building companies and taking real risk. Paul and I did another clip yesterday about Facebook, where he argued it doesn't make sense for Facebook to stay a stand alone company anymore because the ad markets are going to be locked up for 24 months.
I love P-Ked, but what the hell does a 24 month contraction have to do with building a company? Especially a company that's still private, growing like mad, has loads of money in the bank and is essentially break even? We've got to break ourselves from this quick-fix, quarter-to-quarter mentality of Wall Street-- and increasingly Silicon Valley-- if any next great tech companies are going to be formed. The very reason great companies are typically started during downturns is they're started by people who aren't obsessed with timing a market. They're started by real entrepreneurs.
Paul and I also debated what Facebook's "real" value is now, and I put real in quotes because startup valuations are always based on promise, team, and a lot of other intangibles that will hopefully lead to a great business, but don't reflect business fundamentals right now. Yes, Facebook still has to nail its business model, and if it doesn't it's valuation could fall by 90%. But I argue the downturn is a great time to do that, especially considering the amount of money Facebook has raised for cheap and revenue it already gets from its lucrative Microsoft ad contracts. Is it worth $15 billion? No but it never was, as I explain in the clip below. It's definitely worth somewhere in the low billions and definitely shouldn't sell this year in a panicked market where every big company has a weakened stock currency.
Remember the column I did about the bluest of the blue blood endowments looking to sell off their stakes in venture firms in the secondary market? As I said then, it wasn't necessarily because they don't believe in the asset class, but with the mass beating they are taking in almost every security they're invested in, they have to realign their portfolios, and in some cases get some liquidity.
Here's more today on just how bad things are for Harvard's incredible shrinking endowment. The gist: The $8 billion loss the $38 billion fund reported is probably more like $18 billion-- in part because illiquid assets, like stakes in private companies, that hadn't been marked down when the previous figure was announced. This is a big reason one of my sources thought it'd be 2009 until secondary buyers snapped up the stakes in venture firms, no matter how big the name. No one knows what they are worth.
I found the Huffington Post story via The Atlantic and the tone of the post there reveals there's no small amount of schadenfreude when it comes to watching Harvard stumble. That's not just a Wall Street thing. Here in the Valley there's plenty coming from firms that didn't measure up to the Yale/Harvard standards, as well as from other LPs who were never deemed at the Harvard/Yale level. But to be fair, it's not like anyone is skating through this market unscathed, and if it weren't for schools like Yale and Harvard believing in venture capital early on, the industry wouldn't be as big as it is today. (Of course, some say that could be a good thing. But that's another column...)
As I've said before, I'm starting to get irrationally freaked about the downturn and just how much worse 2009 could get. But my fears of every employer of ours going insolvent, and Mr. Lacy and I ending up in the poor house are-- by any stretch-- a long shot. Even the worst case scenario is likely some belt tightening, which we've done before and can do again. (Tip: Short Diane Von Furstenberg if this occurs.)
But there is something else I'm very scared about, and it's all too rational: Unintended consequences of government intervention. The TARP bailout was merely the beginning to a drunken spree of spending, regulation and scapegoats that'll continue at least through first quarter of 2009, and I'm betting even longer. It's a mad-dash to soothe the stock market, which is irrational at best. And you know what happens in mad-dashes? People fall and trip on scissors.
First, consider, a cautionary tale from the last bust: Here's a great piece in the Wall Street Journal by Mike Malone, one of my very favorite authors. (In fact, Infinite Loop is the best book written on Apple IMHO. Not too late to get one for your favorite fan boy for Christmas....) Malone's piece echoes several of the "Nontrepreneur" chapter in my book, and a good many columns I've written about the very real problems venture capitalists are facing, although I tend to point the finger at Wall Street more than Washington. As usual, Malone makes his points in elegant style.
And now a cautionary tale for 2009. Paul "It's only fairly apocalyptic" Kedrosky likes to come up with doomsday scenarios, and sadly in 2008 a lot of them were right on. But this situation he describes in our video below is one of the scariest. (Hint: ZOMBIES!)
This is what happens when we slap-dash regulations and bailouts to pacify voters and mob-investors. I don't know a single expert, journalist, commentator or luminary that said the bailout plan was well thought out. But at the same time there was high-pitched screeching when it wasn't immediately passed. This is just one unintended consequence of the "YOU HAVE TO DO SOMETHING!" school of governance. Do you know how many we haven't even seen yet?
I started my career covering regional banks and you can't overestimate how much the fabric of America is woven into them. The U.S. Government certainly can't afford to bail them all out. Already we're stretched so thin, China is downgrading our credit rating for the first time.
I know, I know, not exactly happy Christmas wishes. The above video is far more suited for Halloween.
SO. After a whirlwind 2008 where I met entrepreneurs in about 25 cities or more, I am finally back in San Francisco for a while.
I feel very torn. It's been an amazing year, and I've met so many amazing people. My entire concept of entrepreneurship has been forever changed, and I am, of course, so grateful for the outpouring of support for the book. It's been one of the toughest book-buying markets in publishers' memories and it was no small feat to keep copies moving!
On the plus side of being home, I've barely gotten to live in the house that's continually draining my bank account lately, and it's always nice to see my husband. I also feel like meeting so many entrepreneurs around the world has come at the cost of not staying in better touch with entrepreneurs in the Valley. So it'll be nice to stay put for a bit and reconnect. And what better time than a month with a zillion Holiday parties? Headed to the Zynga party tonight, and of course, there's the sarahlacy.com happy hour at the Beauty Bar in one week! RSVP, y'all!
Here are Olivia and I after the spectacular Get Satisfaction party last Friday, inhaling some Arinell's pizza. (Just a few blocks from my house-- another win to being home!) [photo credit: Geoffrey Ellis]
Of course, another *huge* plus in being home is that I can focus more on my actual job: reporting. I forgot to mention it, but I re-upped my columnist contract with BusinessWeek in November. I was incredibly flattered to even get it renewed given the macro state of the economy and how hard hit media has been already. (And how flaky I've been on deadlines. Doh.)
I wrote two columns that detailed *why* things are going to be far worse for Venture Capitalists in this downturn, even as the Valley will have an easier time than in 2001-ish. You can read them here and here. Then, this week, I wrote about everything that's wrong with eCommerce and why I think we're about to see an explosion of innovation. (And why I can't wait!) I've got a lot of great ideas for the next few months, but as always hit me up if there's a topic you want me to tackle!
I've also been pretty busy at TechTicker. A few recent videos I liked on the jump!
A whole slew of other changes are in store for my various jobs and include a few new projects that I can't wait to tell you guys about. But more details on all that later... Bottom line is I'm mostly out of promotion mode (FINALLY!) and solidly back in reporter mode so more great content coming your way this month and in 2009.
And now, to some videos...
Pets.com may have been one of the most wasteful and frivolous of dot com companies, but Dogster is one of the most disciplined of the Web 2.0 generation. It's interesting since Pets.com had a clearer business model, and satisfied a more obvious need. Just goes to show execution wins, in a downturn or no. While a lot of Dogster's smart moves were made in the company's early days, there are plenty of tips in my TechTicker interview with Dogster CEO Ted Rheingold for cash-strapped entrepreneurs worried about 2009.
Clip two (featuring moxie!):
My guest today on TechTicker was Keith Rabois of Slide. Before Slide, Keith was an early member of the PayPal mafia and an early exec at LinkedIn. He also has an advisory role with Sequoia Capital -- where among other exploits he pretty much hand-delivered YouTube to the firm. In other words, in a sea of engineer-minded entrepreneurs, Keith actually knows a thing or two about the business side of startups. He also has opinions and isn't afraid to voice them.
I had to de-Southern myself before taping as I usually sound like I'm saying "Rab-a-way" instead of Rabois. No joke, Mr. Lacy thought it was spelled this way for about the first six months I knew Keith. Ah, the downside of being on camera-- proper pronunciation!
The funniest backstage moment this morning was when the control room told me my guest was ready and I sat down, shuffled my notes and looked up to see a very, very old man in the monitor. "Um, that's not Keith," I said. Oddly enough, the guy sort of looked like a 50-year-older Keith, so I half-wondered if the downturn was just aging him. Turns out, the studio was just confused.
So here are the clips in case you didn't make it over to TechTicker today. The first one is on all the layoffs in the startup world last week (some 250 jobs all together and counting) and what separates companies that are seeing opportunity in the downturn from those seeing doom and gloom. The second clip is about how all those layoffs and hard-to-get-series-b-rounds will ripple into Silicon Valley's macro economy. And the third is about Slide itself: a company planning to spend its way out of the downturn.
Some of us (Read: those who don't plan/have a book to promote in November) choose to go to London at a different time than everyone else in Silicon Valley. So since I'm the only person in the Valley not at FOWA in London right now, I didn't hear Kevin Rose's keynote. But apparently I didn't have to. It nicely echoes what I wrote here: That Digg has picked a fork in the road and is ready to grow up and prove it can be more than a fan boy site filled with Microsoft ads. (Convenient timing for me too, since I'm updating "Once You're Lucky" for paperback.) As someone who has spent a lot of time giving Digg tough love, but also defending what Kevin and Jay have done well, I'm rooting for them.
(Sorry for the crowing, but I'm getting a lot of kudos on my latest Valley Girl column and am enjoying feeling like an actual reporter again today, less obnoxious self-promotional media persona. Well, except this somewhat self-promotional post and my upcoming interview on KQED's Forum in an hour...)
Now that I've heaped praise on one corner of Memphis and its entrepreneur scene, time to criticize a bit. Whether corporate or private, it's clear there's a lot of money to be thrown at building a Memphis-Tech scene. But it's not always being focused in the right spots.
Two examples make the point, I think.
Here at SarahLacy.com you could say we're investing in the growth of the business. Think the User Generated Book Tour makes money? HA! My credit cards are wheezing from overuse. And the very talented Olivia certainly isn't volunteering, nor should she be. Combined with a new mortgage and an upcoming $10,000 electrician bill, Mr. Lacy is getting a little antsy about all the money flowing out of our accounts. YouNoodle just made me feel a whole lot better.
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